Once again, online deals retailer Groupon (NASDAQ:GRPN) missed the mark when it reported third-quarter results earlier this month. Revenue fell slightly short of expectations, growing 32% year over year to $568.6 million. The firm's loss shrank to $2.9 million, or breakeven on a per share basis, which was short of consensus estimates calling for a profit of $0.03.
Roughly 80% revenue expansion in North America was overshadowed by weak 3% international growth. Furthermore, third-party and other revenue was flat year over year at $423.5 million. All of Groupon's growth came from Groupon Goods, as Direct Revenue increased significantly year over year to $144.9 million and doubled quarter over quarter. However, we're not too bullish on this dramatic shift. Gross margins in the Groupon Goods business totaled 12%, compared to 87% for the deals business.
Although this may require less SG&A spending, the space is incredibly competitive and is cluttered with other clearance sites such as Overstock.com (NASDAQ:OSTK) and even Amazon.com (NASDAQ:AMZN). While the online deal space is certainly cooling off, we don't like the firm's decision to battle head to head with other established giants in a low-margin business. In fact, the weakness from LivingSocial and the death of other startup coupon companies could allow Groupon to become the sole leader in the space.
International revenue grew just 3% to $276.9 million, and gross billing (total amount of goods sold) fell off a cliff, down 12% year over year. The firm's international business is European, and with seemingly all of the European Union flirting with recession, we expect this segment to experience prolonged weakness.
Still, the company remains relatively well-capitalized for the time being, and continues to generate some cash. Free cash flow during the third quarter was $26 million -- down substantially from a year ago, but still positive. Headcount was up year over year, but fell by over 800 employees sequentially, which is a positive for cost containment, in our view. Active customers also ticked up 4% sequentially to 39.5 million, likely benefiting from the expansion of Groupon Goods.
Liquidity remains fine, in our view. Recent market performance suggests bankruptcy may not be too far off, but we don't think that's the case. Revenue, albeit at a lower margin, continues to grow and the company has ample liquidity to survive (at least for now). Plus, we think headcount could absorb further reductions without materially impacting the top line. The company has $1.2 billion in cash vs. $879 million in accrued expenses and payables. Of course, this could change quickly, especially if revenue from third parties continues to stagnate.
Groupon continues to hold an interesting position as the largest online coupon marketplace, but the brand has lost some of its luster and its current transformation is questionable, in our view. We're not at all interested in shares at this level, and we think liquidity could become a problem in mid-2013 if cash flow doesn't improve.
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